Thursday, December 31, 2009

So, for something light on the last day of the decade during which we have said "two thousand one" and "two thousand nine" and so on, even though we say "ten sixty six" when referring to the date of the Norman conquest of England. Allow me to define "syllabic efficiency" as saying something with the fewest syllables.During this still nameless decade it has been of equal syllabic efficiency to say "two thousand one" versus "twenty oh one," which was the alternative nobody ever did, probably because since 1968, if not earlier, we had been saying "Two Thousand One: A Space Odyssey" for the book/movie by Arthur C. Clarke, which put us into a path dependence favoring saying "two thousand." Now we are at the potential switch point where it would be more syllabically efficient from tomorrow on to say "twenty..." rather than "two thousand..." by one syllable, because there is no more need to say that "oh" that nobody said anyway. In listening I have heard a split in speaking of next year, with some people saying "twenty ten" and some saying "two thousand ten." Which will it be, folks? Will syllabic efficiency (and the practice prior to this century) win out, or will be stuck with syllabic inefficiency due to a path dependence that Arthur C. Clarke bequeathed to us?

Wednesday, December 30, 2009

In his closing remarks in The Economist debate on European vacations, Professor Robert J. Gordon once again invoked the bogus lump-of-labour fallacy but not before himself committing the "fixed-amount-of-this-that-and-the-other-thing fallacy" oh, about four or five times in a "calculation" of how much income Europeans would take home if they worked as many hours as Americans.

Let us figure out how much Europeans pay for shorter annual hours of work in general and their longer days of vacation in particular. International data comparing Europe and the United States in dollars of equivalent purchasing power show that the ratio of Europe to the United States is 90% for output per hour, 68% for output per person and 75% for hours of work per person. Converting these ratios to real GDP per household (using 2.5 people per household, the US figure for 2004) yields a US GDP per household of $120,000 compared with a European value of $81,600.But Europeans are not allowed to keep this amount, because OECD data show that they pay 39.15 of GDP in taxes, compared with 25% in the United States. This brings European take-home pay down to $49,700 compared with $90,000 in the United States, or 55% as much. If Europeans worked as many annual hours as Americans, their per-household GDP would be 90% as high (the remaining difference is due to lower productivity) and their take-home pay would leap to $76,100, an increase of 53%. The disproportionate impact on take-home pay occurs because total government tax revenue stays the same, greatly reducing the share of taxes in GDP due to spreading the costs of European government across many more hours of work. Given the large discrepancy in GDP per head, the lower American tax rates generate almost as much tax revenue as the higher European rates: $30,000 compared with $31,900.

This multiplier effect, that raising European hours of work by 32% would raise take-home pay by 53%, carries over to the portion of shorter European hours attributable to longer vacations. So the proper question Mr de Graaf should be asking Europeans is not whether they like their long vacations or would like to enjoy longer ones. Rather, he should be asking whether lengthening their vacations by one more week, five out of the 365 days in the year, or 1.4%, would be worth giving up an extra 4.4% ($2,200) in take-home pay.

Unfortunately, Europeans have not been asked to vote on this question, nor on the question of whether the alternative of working American hours per year (including lower unemployment, higher labour force participation, shorter vacations and a higher age of retirement) would be worth an extra 53% ($26,400 per household) higher take-home pay. Politicians and union leaders have been taken in by the "lump of labour" fallacy and have spun a web of employment protection regulations, restrictions on hours, early retirement and high taxes, in the mistaken belief forcing people to work less creates new jobs for others. Most Europeans would be surprised to learn how much real money they have sacrificed at the altar of this fallacy.

Tuesday, December 29, 2009

Monday was the 10th of Muharram in the lunar Islamic calendar, which slides by 10-11 days per Gregorian solar year, which is celebrated by Shi'i Muslims as Ashura, their holiest sectarian day, the anniversary of the martyrdom at the hands of Sunni Muslims commanded by Caliph Yezid of the grandson of the Prophet Muhammed, Hussein, now buried in Karbala, Iraq. Traditionally, devout Shi'a march in the streets flagellating themselves in his memory and honor. This year there was violence in three neighboring countries on this day, Iraq, Iran, and Pakistan, but for different reasons in each case.In majority Shi'i Iraq celebrating Ashura used to be banned under Sadaam Hussein. After his overthrow it was joyously celebrated and was supported by the new regime. For the first time this year many of those celebrating manifested anti-government slogans and speeches, mostly accusing the al-Maliki government of corruption. The violence erupted when a Sunni radical suicide bombed some marchers, killing six and setting off riots.

Much more publicity has attended to majority Shi'i Iran, where both the government and the opposition support celebrating it, and there were some pro-government groups who celebrated it in the usual fashion, without incident. However, opposition groups used it to criticize the anti-democratic and repressive regime, with this bolstered by demonstrations following the death seven days earlier of the most prominent anti-regime Grand Ayatollah, Hossein Ali Montazeri. The new demonstations included for the first time open criticism of Supreme Jurisprudent, Ali Khamene'i, as well as attacks on Basiji (private militia) outposts, and some security people refusing to fire on the crowds. Ashura is traditionally supposed to be a time of peace and truces, and the government is in total violation of this, along with the latest report that they are holding the bodies of five people killed to avoid demonstrations at their funerals, one of those being the nephew of the main opponent of Ahmadinejad in the June presidential election, Moussavi.

Pakistan is majority Sunni, with about 20% of the population Shi'a. Ashura is often accompanied by riots there whenever Sunnis mock the marching Shi'a. Last year 40 died when a Sunni attacked the Shi'a in the Hongu, which was under strict curfew this year. This year only 30 died in a suicide bomb attack by a radical Sunni in Karachi, the country's largest city, which, big surprise, triggered rioting by Shi'a in that city.

Monday, December 28, 2009

So a member in good standing of the Nigerian economic and political elite contacts the US embassy in Yemen. He says his son has gone off the deep end, fallen in with radical jihadis, and has traveled to Yemen to link up with fellow combatants.

And what does the embassy do? They put the son’s name on a list with 550,000 others—people who have attracted suspicion for any reason and no reason, intellectuals or just ordinary people who have expressed ideas evoking the disapproval of US officials (think of Tariq Ramadan), and untold numbers whose names were flagged purely by profiling.

Of course, a list of 550,000 names is no list at all. You are not going to do expanded searches on all of them in airport security lines, nor run all their luggage past canine noses. No, they will just board the airplane, and you must hope for the best.

The first decade of the New Millenium saw the state of Tasmania, Australia reach third world status.

Hundreds of thousands of hectares of native forest, much of it pristine old-growth and rare temperate rainforest, were converted to a vast gigantic monoculture. A single species of tree in neat rows now spans almost the entire north of the state from the West Coast to the East Coast in a land the size of Ireland.[1]

Environment, land-occupancy, planning and zoning laws were changed to facilitate the takeover of family farms by a privileged network of heavily-taxpayer-subsidised agribusiness corporations. Bands of former Australian politicians soon joined the staff of these new 'enterprises' to share in the extraordinary windfall profits that flowed from this stepped-up rape and pillage. Annual reports and meetings included assurances to global investors that there were no serious impediments to profit-taking by way of environmental laws or considerations for conservation.In a mere decade common and iconic animals such as the Tasmanian devil, the bandicoot [2] the Tasmanian quoll and four species of burrowing crayfish[3] became an endangered species. The wedge-tailed eagle is "under threat from all fronts" [4] while the local platypus were reported to display a "unique sensitivity to developing chronic skin ulcers ... whereas the disease is not seen in mainland platypus" [5]. State and Federal Governments deliberately failed to incorporate scientific evidence into government decision making. [6] Nor did the Government provide adequate protection plans for these animals. [7] The abuse and neglect of our wildlife and flora was further reinforced when the Federal Environment Protection and Biodiversity Conservation Act was amended to accommodate trumped-up government notions of what constituted 'protection'. [8]

After ten years water courses used for irrigation and domestic water supplies began to dry up[9] and became repeatedly contaminated by pesticides [10]. These chemicals have been long banned in other nations because of their toxicity and ease of movement in the environment. So, it was no surprise to read that in this state, where residents are forced to live in what amounts to a giant agribusiness industrial zone, that Tasmanians have significantly 'poorer health outcomes compared to other Australians" [11] . In fact, three out of every four Tasmanians suffer from a chronic health condition which often "renders them unable to hold down a job and sees them struggle with simple daily tasks." [12] Given the sheer scale of environmental and health degradation the Tasmanian Government has clearly found it a much more lucrative proposition to protect themselves over and above their constituency. Epidemiological and public health research outcomes remain long suppressed [13] as are the spray drift models for current 'forestry' aerial spray practices, for instance.[14]

Globally, it is hard to calculate exactly how huge the Tasmanian 'forest' industry's contribution is to global warming. It must be massive, however. Hundreds of giant infernos are now lit with napalm; deliberately and routinely each year across the state as well as over the nation as a whole. Hundred of years of biomass in old growth forests have been put to the match, ancient stumps turned to charcoal and soils baked to a brick red. Now the plantations that have replaced these destroyed forests provide perfect fuel for much bigger wild fires that have begun to rage out of control with the advent of a dryer and hotter climate in South East Australia. [15]

Tasmania's communities are struggling like they never have before. The state's economy is quickly coming to a standstill with the biggest woodchipper, Gunns Ltd, now unable (at least for the time being) to find sufficient buyers for it 'product'. But the story of Tasmania's precipitous decline was foretold by many ordinary people whose clarity of thought was not polluted by heedless self-interest and bad morals. To see now that the dirty invisible hands of unfettered markets have spread their grasp into the first world makes me wonder just how little there must now be left to plunder in third world nations.

After all this, though, I can see that our forests and habitats in Tasmania have been killed - not by an enemy separate from ourselves - but by the aggregate consumption habits of a billion people on earth today. This is h-u-g-e and nothing more nor less than the enigma of people limited irrevocably to thoughts of childhood self-gratification. The state, says Tocqueville has prompted us to "dream of nothing other than being happy."

I want to dream of a future; to dream of downed-wallets and powered-down lives. Maintenance of the huge possibility of continued human life on the planet requires our urgent change, now.

[1] “Tasmania ran up the country’s largest area of new plantation in 2008, with 27% of the total from slightly less than 0.9 of Australia’s land area”. This was all proudly reported by the Bureau of Rural Science in Tasmania’s Examiner newspaper on 23rd April 2009, notwithstanding the announced collapse of MIS giant Timbercorp, also reported on this day.Comment by Tasmanian resident John Haywardhttp://tasmaniantimes.com/index.php?/weblog/comments/mckim/

[8] Protection of the environment was converted in meaning to a mere presumption of law that cannot be rebutted by evidence and must be taken to be the case whatever the evidence to the contrary. See the history of Brown v Forestry Tasmania [The Wielangta Case]

[9] "After about 10 years' growth under intensive plantations, about one-in-eight of the streams that were in the areas that we studied had no flow for a year or more, and overall there was a 50 per cent reduction in stream flow," As quoted in: Plantations may do more harm than good, says CSIROLast Update: Sunday, January 1, 2006. 9:10am (AEDT)http://www.abc.net.au/news/newsitems/200601/s1540198.htm

[10] Editorial: Not weak on water, 4th August 2009www.themercury.com.au/article/2009/08/04/33155_editorial.html

[14] The Australian Pesticides and Veterinary Medicines Authority (APVMA) had repeatedly failed to provide the aerial spray drift model outcomes requested by Brenda Rosser (moderator, Tasmanian Clean Water Network) for years now.

[15] The record bushfires of Victoria in February 2009 bear witness to this new and frightening development:(i)Fire/land tenure map of the Murrindindi fire that burnt through Marysville overlaid onto the latest NASA satellite Infrared Image.25/02/2009 8:46 amhttp://www.myenvironment.net.au/index.php/me/resources/bush_fire/research/fire_land_tenure_map_of_the_murrindindi_fire_that_burnt_through_marysville_overlaid_onto_the_latest_nasa_satellite_infrared_image

(ii) Links between bush fire and logging coupes08/03/2009 1:24 pm http://www.myenvironment.net.au/index.php/me/resources/bush_fire/research/links_between_bush_fire_and_logging_coupes“….a logging map created from the DSEs forest explorer interactive maps. It may be more than a coincidence that the fire pattern just happens to follow coups logged over the last 30 years - hence lots of regen/regrowth, thirstier young trees, dryer undergrowth etc etc....

While the US frittered away much of the stimulus on throwing money at banks, the Chinese actually created much more capacity. Business Week used to do a good job of understanding real issues. Here the new Bloomberg magazine notes that the extra capacity poses a risk to the West because China will now have to export more, creating a different sort of imbalance.

While Beijing's $586 billion stimulus package has helped the mainland navigate the global financial crisis, there's a downside. Fixed asset investment -- money spent on factories, highways, and other big-ticket projects -- soared 40% in the first half and accounted for nearly all of the country's growth.

Saturday, December 26, 2009

I have to begin by saying that I appreciate the very civil tone adopted by Rachel Cleetus and UCS. It almost doesn’t feel like the internet.

Now on to the disagreements.1. I stand by my claim that the least significant part of any climate bill is what it says it will do in 2020 or 2050. In a few more days, 2020 will still be a decade away. A decade ago Alan Greenspan was getting nervous that federal government would retire its bonds, become a net creditor and start buying up financial assets. OK, he gets credit for one out of three. Seriously, we will change our targets for carbon reduction over the next ten years, probably several times. If Rachel wants to put more stress on immediate action, that would make sense, but 2020? As for a science review process, fine, but it’s naive to think that any such mechanism will generate automatic revisions in such a crucial policy variable as cuts in carbon consumption. It will be political every time.

2. The statement that “tropical forests....are a source of 15% of global emissions” is simply wrong. Climate change is not a carbon emissions problem, it’s a carbon cycle problem. We are better off with more forests than less because they buy us some precious time, but in the end it’s about the extraction and combustion of fossil fuels. This is an important distinction to make because there are powerful financial interests that want to convince us we can get to a stable climate by shelling out money for forests rather than cutting deeply into our fuel consumption. No.

3. At the risk of dragging the tone of this discussion into the gutter, I will say that Rachel is being disingenuous when she writes that support for tropical forests, clean development in low-income countries etc. is “not about offsets”, when clearly it is. The bill she prefers, Kerry-Boxer, is loaded with them. She is right to say that this falls within the current UN framework, but if you think, as I do, that offsets are the wrong way to go, you have a problem with that framework as well. The Copenhagen fiasco tells me the time is right to change it.

4. As I’ve written on several other occasions in this blog, it is delusional for environmental groups to allocate in their imaginations the billions and billions from carbon offsets to all their favorite causes, from energy conservation to R&D to generous support for the victims of climate change around the world. It’s not that we don’t need all those things. There are just two problems: (1) If there are to be such massive auctions, the income they generate will be taken out of the hide of consumers—it will be a mega sales tax. Such taxes are very regressive. It is very bad social justice to advocate a radical shift in public finance from moderately progressive income taxes to radically regressive sales taxes. And, no, Kerry-Boxer will not protect consumers from these price hikes. If they did we would have paralyzing energy shortages, worse than we had in the 1970s when oil prices were capped. (2) But we won’t have these lovely auction revenues to allocate in the first place. No government that has to face democratic elections will enact carbon restrictions that eviscerate the household budgets of its citizens. Despite all the rhetoric it hasn’t happened yet, and it won’t happen, ever. The only way to get the tight carbon caps we need is to give the money back, and to hard wire that promise into the legislation itself. If the commitment isn’t credible, the politicians will always run for cover when the chips are down. There’s no guarantee that rebating carbon revenues will be sufficient, but it’s a sine qua non. If the Europeans, who are much better informed and more supportive of action on carbon mitigation than we are, won’t tax themselves sufficiently for the cause, why do you expect this of Americans?

5. I agree that in a perfect world we would start by investing in energy efficiency and green R&D. I will support any bill that UCS writes that allocates money from the general budget for this purpose. Sign me up. But: (1) if the money comes at the expense of rebating skyrocketing energy costs it will render politically unattainable the overall cap that has to be the centerpiece of our policy, and (2) as a practical matter, the public will not support a big shift in spending toward these programs until after they see their energy costs go way up. I have put my name on every petition for mass transit and similar causes for 40 years and have seen almost every struggle go down to defeat. In a world of cheap gas, people don’t have to invest in alternatives, so they don’t. I’m afraid that, to quote someone who is not supposed to be quoted any more, when it comes to this topic, it is not people’s consciousness that governs their material conditions, but their material conditions that govern their consciousness.

6. To briefly reprise my previous post: one of the mistakes of the Kyoto-Copenhagen framework was to tie together mitigation and adaptation—to hold joint action on minimizing climate change hostage to arrangements to compensate the victims. I’m certainly for compensating the victims—and more—but not if it leads to gridlock. Fortunately, there is a gathering international consensus that the time has come for global financial mechanisms to address global concerns, like massive, extreme poverty, illiteracy, disease—and adaptation to climate change. Every other developed country except this one has joined the Leading Group and is discussing which financing mechanisms to put in place. The first of these, an airline ticket tax that pays for life-saving pharmaceuticals in the poorest countries, has already been implemented by eleven countries. If UCS wants the US to stand up to its international obligations, a good place to start would be getting the US into the Leading Group and supporting the fundamental reform of international finance. Crippling essential action on climate change by threatening to bleed households and then earmarking a fraction for Good Works Far Away is not a wise alternative.

Wednesday, December 23, 2009

Some say one reason we are seeing so little commentary on the end of the decade is that nobody knows what to call it. Is it the Aughties, the Noughties, or maybe just the Naughties? Some (the crowd over at Marginal Revolution) argues that much went well in places like China and India, where living standards for millions clearly rose. Cannot disagree. However, most think things not so hot (or maybe too hot) here in the US. Yesterday, Juan Cole at http://www.juancole.com gave a list of the Ten Worst Things for the US in the Bush Decade, which I repeat here without further comment, although he provides more.10) stagnating worker wages and emergence of new monied aristocracy9) greater health and food insecurity for Americans8) environment more polluted7) imperial presidency ensconced6) Katrina destruction of African-American neighborhoods in New Orleans5) mishandling of Afghanistan4) Iraq war3) $12 trillion Bank Robbery associated with deregulation2) 9/11 attack, with Bush laughing at CIA warning on 8/6/011) stolen 2000 presidential election.

There is an old saying that there are two things one should not look too closely at: the making of sausages and the passing of laws. In the case of what is left of health care "reform" after all the purging and paying off, which may be passed tomorrow by the Senate, this is the case more than usual. It is not a change of system, but at best an extension of the existing system, even though Obama said he would change it, and many among the Dems in Congress have pushed for more serious systemic change. As it is, I see six different possible systems broadly:1) pure laissez faire, done in the US in the past, but no longer in place in any high income country, 2) the US system of for-profit private insurance with some state provision (medicare, medicaid), 3) a universal system of non-profit private insurance, what is in place in the Netherlands and Switzerland, 4) a universal coverage system of private-non-profit coverage through employment and a public option for rest, found in Germany and France (whose system has been rated the world's best by the WHO), 5) a single payer public system, with healthcare workers self-employed, Canada an example, and 6) a fully socialized system with healthcare workers state employees as in the UK and the former Soviet Union. I think that Obama was pushing for something like the French system, although keeping our useless for-profit insurance companies, but, well, not only sausage in the making, but pretty smelly sausage coming out the other end...

Tuesday, December 22, 2009

Given the anti-intellectualism of today, maybe this is the answer for high tuition.

Mill, John Stuart. 1848. Principles of Political Economy with some of their Applications to Social Philosophy, John Robson, ed., Vols. 2 and 3 of The Collected Works of John Stuart Mill (Toronto: University of Toronto Press, 1965- ).

391: "Before the invention of the art of printing, a scholar and a beggar seem to have been terms very nearly synonymous. The different governors of the universities before that time appear to have often granted licences to their scholars to beg."

WSJ: "The two-week Copenhagen conference appeared set to end with no agreement at all, until last-minute bargaining among leaders from the U.S., China, Brazil, India and South Africa produced a final statement. A handful of countries, including Sudan, Venezuela and Bolivia, declined to endorse the 11th-hour deal."

NY Times: Andreas Carlgren, the environment minister of Sweden, the country holding the rotating E.U. presidency, said that the summit meeting had been a “great failure” partly because other nations had rejected targets and a timetable for the rest of the world to sign on to binding emissions reductions .... It was obvious that the United States and China didn’t want more than we achieved at Copenhagen,” Mr. Carlgren said at a news conference in Brussels. The obstacles created by those countries were “part of what we regretted,” he said."

Monday, December 21, 2009

Gordon: "To engage in this debate in December 2009 requires that we play a fantasy game..."

It is fitting that Professor Gordon admits he is playing a fantasy game. To equate unemployment with vacation is a bizarre and callous fantasy. To equate market income per capita with standard of living is a strange and fantastic category mistake that could only be made by someone for whom "money is reality, while leisure is an empty spot in time devoid of wealth-producing activities."But Professor Gordon crosses over the line from fantasy into delusion when he invokes the so-called "lump of labor fallacy" to disparage policies that encourage shorter hours of work. The fallacy claim is a weird concoction that many economists fancy to be their "knockout punch" against work time reduction. It consists of the bogus claim that advocates of shorter hours assume there is "a fixed amount of work to be done" regardless of labor costs, work arrangements, demographic trends or consumer demand. Advocates of work time reduction assume no such thing.

Policies to encourage shorter hours do not rely on any such ridiculous assumption. No economist has ever produced a coherent argument or substantive evidence to show that advocates assume a fixed amount of work or that policies rely upon such an assumption. All economists have done is repeat the assertion ad nauseum. Repetition doesn't make it so.

The lump of labor fallacy amounts to little more than schoolyard name-calling. But – and this is a crucial point – it is name calling with a long and very peculiar history that has nothing to do with economic analysis and everything to do with reactionary ideology and polemics. Professor Gordon is sadly unaware that this curious history of the lump-of-labor fallacy claim has been painstakingly documented (see "Why Economists Dislike a Lump of Labor" ).

In his March 2005 musings [1] on the reasons for a so-called global savings glut Ben Bernanke asserted that the US current account deficit was, by definition, “the excess of U.S. payments to foreigners over payments received in a given period.”

Thus the entire official meaning of ‘current account deficit’ hinges on the US Federal Reserve’s definition of what a ‘foreigner’ is. And what is a ‘foreigner’? Today most world ‘trade’ is dominated by giant transnational corporations (TNCs) who exchange goods, services and money within themselves and/or network with other TNCs. [2] The vast majority of these giant conglomerates are of US in origin. What that effectively means is that the US controls most global ‘trade’[3].

“According to the Forbes Magazine’s ranking of 2007, the first five largest corporations of all times are not industrial but financial institutions.”

It is no coincidence that four out of five of these were from the US. [4]

A single US corporation, Walmart is China's fifth-largest export market, ahead of Germany and Britain [5] and “Wal-Mart is responsible for approximately 10 percent of the United States' trade deficit with China.” [6], [7]

In fact, a new international system has emerged since the 2nd world war. It is unipolar and hierarchical. It is empire. "The United States has become the global 'world state' or 'world power' to which there is no challenger. There are now "extremely high levels of economic and financial integration" that "motivate cooperation especially in trade….[The US] "sets its own legal and moral standards admitting to no external sources of authority." [8], [9]

There is incontrovertible evidence that the US has come to its own unique definition of what is ‘foreign’ in its trading accounts with the rest of the world. As explained above, US companies dominate world commercial exchanges and transact with each other across national boundaries. Much of this trade is unrecorded in that the money transactions that do occur are often understated. The strong trend is for these large firms’ accounting statistics to be designed to actually ‘create’ losses in order to avoid taxation.[10]

The establishment of a myriad of shell companies using offshore tax havens often makes it impossible to trace or measure the proceeds of international transactions. Further, up until early in 2008 the US Treasury’s definition of the words ‘foreign and ‘domestic’ was based on where the commercial entity was "created or organised". In May 2008 the definition of 'domestic' was changed. The purpose of this move was to exclude from 'domestic' those entities 'created or organised' outside of the US and who also had 'substantial foreign ownership'. [11] But the dubious definition of 'foreign' remained.

So where are we headed with this creeping loss of meaning. Despite a reigning US President now wearing Democrat robes ‘preferred nomenclature’ remains the order of the day. In Reagan’s time, just as it is at present, nations that are to be rolled back have governments that are called ‘terrorist’. Countries that are to be supported against unwanted insurgencies are still called ‘democratic’. But in things financial we now have a cleverer and more constant application of propaganda. We can see that money and goods that never change hands is now considered ‘trade’.

"Let us begin by committing ourselves to the truth, to see it like it is and to tell it like it is, to find the truth, to speak the truth and live with the truth."

Richard Nixon's nomination acceptance speech, Miami, August 8th 1968

[1] The Global Saving Glut and the U.S. Current Account Deficithttp://www.federalreserve.gov/boarddocs/speeches/2005/200503102/

[7] A board member of the Reserve Bank of Australia - Roger Corbett - is a Member of the Board of Directors of Wal-Mart Stores, Inc as well as Fairfax Media Limited (one of Australia's oligopoly media empires). He is also Deputy Chairman, Non-Executive Director of PrimeAg, a corporation established in December 2007 and that has set its sights on a massive land and water grab in Australia using a lot of investor money from overseas.

[8] 'Towards a Hierarchical International System? THIS Network.Department of Political Science and International Relations, University of Tampere, Finland. Working Papers 1/2005

[9] The trillion-dollar TARP bailout of large US financial corporations in 2008 displayed the readiness of America to abandon the austerity programs and principles it imposed on other countries (nations suffering from large current accounts, trading deficits and insolvent trading institutions just like America) when it suited.

[10] See the large number of online discussions relating to the practice of ‘transfer pricing’ in exchanges within and between TNCs.

[11] CFIUS Review of Foreign Investment: U.S. Treasury Department Proposes New Regulations to Govern National Security Review of Foreign Investment in the United States Sullivan & Cromwell LLP - May 8, 2008 http://www.sullcrom.com/publications/detail.aspx?pub=444

Sunday, December 20, 2009

Copenhagen was a disaster, but it was a disaster foretold, the cul-de-sac for a strategy that was flawed from its inception. The only question now is whether climate activists and political leaders will sink another year or two of our precious time into repeating the errors of the past, or whether we can all make a clean break.

There are more flaws with the Kyoto-Copenhagen agenda than I can enumerate, but here are the big ones:1. There is an inherent conflict between the environmental requirements for greenhouse gas mitigation, as those policies are currently posed, and the constraint of political feasibility in a world of electoral democracies (or even tolerated dictatorships, as in China). We need deep, deep cuts in fossil fuel use. The only way to get there is to raise the price of these fuels far beyond anything the world has ever seen. But democratic polities will punish any politician who acts to impoverish them. This is not about the economic cost of forestalling catastrophic climate change; it is about the distributional impact. When carbon prices skyrocket, those who pay suffer and those who receive flourish. This problem is not addressed by sidestepping the issue with bland, distribution-blind capping commitments. Rather, those commitments are revealed as false when governments refuse, for obvious political reasons, to carry them out.

2. The strategy of buying off developing countries through payment for forest preservation or “clean development” is ultimately incoherent and unmanageable. (a) There is no scientific basis for treating a ton of carbon temporarily “fixed” in a forest the same as a ton sequestered for virtual eternity as fossil fuels left in the ground. It violates elementary understanding of the carbon cycle, and no forest ecologist I know defends the idea. This means that science cannot provide any formulas to resolve political disputes over which forest practices to reward and by how much. (b) And there is no political resolution either, because there are too many types of forests and other sinks, too many practices, over too many countries, with too much money on the line. (c) The notion of offsets to finance clean development is self-contradictory. The economic challenge is to fundamentally change what development means by decarbonizing it. This can only happen if prices rise to prohibitively high levels from the standpoint of current practices. Offsets seek to suppress price increases and delay this transition, so at best all they can hope to achieve is to replicate current best practice in developing countries—although their actual performance is far below even this standard.

The contradictions of Kyoto-Copenhagen were buried under layers of diplomatic verbiage, but they never went away. The closer we got to the point at which we had to devise a real, working agreement, the more intractable they become.

This is not the place to spell out a new strategy in detail, but the flaws of the existing one point the way.

1. Revenue recycling must be built into the fundamental architecture of any GHG mitigation scheme in order to sell it to a democratic electorate. All, or nearly all, of the money people pay in much higher energy prices must be returned to them, and the promise to do this must be credible. It cannot go to oil producers, government coffers, or even the fine projects advocated by environmental groups. No politician will dare to impose such prices if households see the money going out but not coming back in. Some version of a rebate program is imperative. This means, in turn, that carbon caps or taxes cannot be used in a substantial way for payments to the developing world.

2. The goal of mitigation policy must be brutally simple: to phase out, as rapidly as possible, the use of coal, then petroleum, then natural gas. Everything else, although important, is secondary. Yes, we need energy R&D, better agriculture and land use policies, infrastructure investments and the rest, but the central mechanism that ratchets down our climate forcing must apply specifically to fossil fuels. Leave them in the ground. Politically, I believe this prioritizing is coherent; it is only in a world of extraordinarily high fossil fuel prices that we will get the electoral support we need for public spending to shift our development trajectory.

As a practical matter, I recommend separating adaptation from the mitigation framework; it really doesn’t belong, and it shouldn’t be an obstacle to emergency preventive action. Rather, funding for adaptation should be combined with Millennium Development Goals, biodiversity preservation and similar “global public goods” within a new framework of global public finance. The United States should, as a matter of extremely high priority, join in the work of the Leading Group on Innovative Finance for Development, and together we should put into place financial transaction taxes, taxes on international shipments of goods that present negative externalities (like arms and scarce nonrenewable resources), and solidarity levies like the already-existing airline ticket tax. Together, these mechanisms could raise funds of $100B or more. Add expanded debt relief, shutting down tax havens and a few other virtuous actions, and we could have the financing to meet all the most urgent global goals, including adaptation to unavoidable climate change.

So where can this new politics come from? The road from here to there probably passes through the major social and environmental NGO’s, but they are unlikely to change course on their own. There needs to be pressure from below. I hope the failure of Copenhagen spreads the message that time is very short, and politics needs to be focused on solutions. The day has passed for vague mantras like “another world is possible”. The only world we have is in serious danger, and those who understand what is at stake need to be militantly practical.

Thursday, December 17, 2009

Hillary Clinton seemed to make a very generous offer in Copenhagen. She promised the poor nations of the world that if they agreed to a compromised climate change program the US would be willing to contribute to $100 billion program to help them by 2020. Maybe I have this wrong, but I could do one better in the same sort of flim-flam. I would be willing to contribute to a $200 billion program that would help these countries if they would agree to accept a compromised program. I even would be to contribute to $1 trillion program -- of course, neither I nor Hillary have made any commitment as to whether we would put up a nickel or serious money.

The point I made in an earlier post about Paul Samuelson has become clearer due to debates on other blogs, most notably on Marginal Revolution, with the paper, "Proof that properly anticipated prices fluctuate randomly," Industrial Management Review, 1965, available at http://www.ifa.com/Media/images/PDF%20files/samuelson-Proof.pdf. This famous paper, cited by Krugman recently as presenting one of Samuelson's eight (nine really) most important original ideas, has been widely misinterpreted by his followers, a case of the "sins of the Sons of Samuelson." It has been interpreted as an early example of showing that markets follow random walks, which in turn are examples of market efficiency in conformance with rational expectations. Pretty much of this is either a misinterpretation or just plain outright false. This latter argument depends on very strong assumptions such as Gaussian distributions of noise. Samuelson's proof is very general, allowing for probability distributions to drift over time (ultimate skewness) as well as to have varying variance (fat tails), and even not to rule out speculative trading by agents. He explicitly states in the conclusions that his theorem does not establish any sort of efficiency outcome to such trading.

Many, including most textbooks (such as Campbell, Lo, and MacKinlay) have simply missed the boat on this, identifying Samuelson with an efficiency result, and then proclaiming him to be wrong because such things as technical trading can make money sometimes. The problem arises from confusing "properly anticipated" with "rational expectations" or at least ratex in a simplistic formulation. Samuelson's result implies that agents are anticipating even the endogenous influence of other traders as well as the usual gaggle of exogenous shocks, and is very general to the form of the probability distribution, thus being perfectly consistent with such outcomes as the peso problem identified in an MIT Ph.D. thesis by Ken Rogoff in 1979. Indeed, Samuelson himself declares his result to be so general as to border on being empirically untestable, and lmost "vacuous," his term. It has been his "sinful sons" who have narrowed it down by making stronger assumptions to claim for it things Samuelson himself never claimed for it (indeed, explicitly denied, such as an implied market efficiency result).

Late reports made it clear that indeed former VP Cheney was conforming to all those reports about certain US leaders wanting to invade Iraq at least partly so that US-based oil companies could get their mitts on Iraqi oil. Well, now the central government of Iraq has held auctions on the major outstanding fields, and the only US company to get a major concession was Exxon Mobil. Doing much better than any US company were Dutch-British-based Royal Dutch Shell, Russia's Lukoil, along with several companies out of China and France. Juan Cole reported on this on Monday at http://www.juancole.com, claiming that oil production there will be limited because of ongoing security concerns (which scared off publicly held US oil companies). Cole disagrees with Ben Lando at iraqoilreport.com, who forecasts that after these deals, Iraqi oil production could rise to compete with Saudi Arabia's, thereby helping to hold down the price of oil. There remains an ongoing dispute between the Iraqi central government and the Kurdish regional government over oil concessions, with the Kurds cutting their own separate deals not recognized by the central government, with more fly-by-night companies banned from the central government's auction. The most important US company in Kurdistan is that run by some of the Hunt family, who had inside information from intel sources during the Bush administration. In any case, the idea that US oil companies would dominate Iraqi oil production in the long run, now looks to have pretty much gone down the tubes.

Paul Samuelson was probably the last of the major economists to experience serious academic anti-Semitism, having experienced Harvard refusing to hire him in 1940 despite his prominence at the time, as well as probably the last one to personally know Keynes, Schumpeter, and Hayek. This put him in a special position to comment on the discussion of their respective anti-Semitisms as studied by Melvin Reder, "The anti-Semitism of some eminent economists," History of Political Economy, 2000, 32, 833-856. In footnote 2 of his "A few remembrances of Friedrich von Hayek (1899-1992)," Journal of Economic Behavior and Organization, Jan. 2009, 69(1), 1-4., Samuelson said the following (noting that Schumpeter was his strongest supporter for being hired at Harvard):

Most of my gifted mentors, born in the nineteenth century, lacked today's 'political (and ethnic) correctness.' There were of course some honorable exceptions among both my Yankee and European teachers. Reder (2000) has provided a useful exploration of such unpleasantries. Central to his expositions were appraisals of the triad John Maynard Keynes, Joseph A. Schumpeter, and Friedrich Hayek on the subject of anti-semitism.

Unexpectedly, I was forced in the end to conclude that Keynes's lifetime profile was the worst of the three. In the record of his letters to wife and other Bloomsbury buddies, Keynes apparently remained in viewpoint much the same as in his Eton essay on the subject as a callow seventeen-year-old. Hayek, I came to realize, seemed to be the one of the three who at least tried to grow beyond his early conditioning. The full record suggests that he did not succeed in fully in cleansing those Augean stables. Still a B grade for effort does trump a C-.

I note a curious irony in that about the same time that Samuelson was not getting hired at Harvard largely due to anti-Semitism (although Schumpeter reportedly alleged that it was due to jealousy of Samuelson's brilliance by his erstwhile peers), Milton Friedman had the same experience at my alma mater, the supposedly progressive University of Wisconsin-Madison, where he was not renewed for a position after one year of appointment. No, this was not institutionalist progressives upset about his pro-laissez faire views, which were not particularly public at that time. Rather, the other issues involved besides the evident anti-Semitism on the part of certain supposedly progressive institutionalists was that he was identified as being a mathematically oriented econometrician who thus threatened the institutionalism then dominant in the department. Over two decades later the final victory of policy-oriented econometrics in the department over the old institutionalists would be led by another Jewish econometrician, Arthur Goldberger, who died at 79 on Dec. 11. Just to really tie all this up in a knot, the very worthy and justly eminent Goldberger (whom I knew and admired personally) was a student of Nobelist Lawrence Klein (with many saying he should have shared the Nobel with Klein), who in turn was a student of Samuelson, although it is a famous old wisecrack that "Samuelson never ran a regression in his lifeюЭ

Wednesday, December 16, 2009

My favorite example of Samuelson's wit is his "algorithm" for solving the Transformation Problem:

1. Write down labor values

2. Erase

3. Write down prices.

And then I think he said, "Voila," if memory serves! (I should confess that when I first read it, I was spitting: at that time I thought, a., that the TP was solvable and, b., that it was very important that it be solved -ah, youth!- and how dare Samuelson ridicule the likes of me).

Of everything he did that I know, I think Samuelson 1958 was the best. A beautiful, simple, funny and earth-shaking paper that changes the way you see the world forever. Anyway, he was a mensch. RIP.

Tuesday, December 15, 2009

In March 2005 the Governor of the Federal Reserve in the US, Ben Bernanke, gave a talk on the reasons for the emergence of a global savings glut during the period beginning from the mid 1990s.[1]

He made specific note of the increasing value of the US dollar in the period from 1996 to early 2000. He ascribed this change to “The development and adoption of new technologies and rising productivity in the United States together with the country's long-standing advantages such as low political risk, strong property rights, and a good regulatory environment. These factors, he said, made the U.S. economy exceptionally attractive to international investors during that period.

"Consequently, capital flowed rapidly into the United States, helping to fuel large appreciations in stock prices and in the value of the dollar."

However, economist Robert Brenner, draws attention to the G-3 economies' deliberate manipulations of global currency markets in 1995.

"With the so-called Reverse Plaza Accord of spring-summer 1995, the G-3 economies did a complete about face. By way of the Plaza Accord of 1985, the leading capitalist powers had agreed to drive up the mark and the yen to reverse the devastation of a US manufacturing sector ravaged by the high dollar. Ten years later, they did the opposite, agreeing to push down the mark and yen to revive German and Japanese manufacturing sectors that had been driven into crisis by the low dollar." [2]

So the US dollar was set artificially lower (relative to the Yen and the German mark) in 1985 in order to aid the ailing US domestic manufacturers, according to Robert Brenner. US producers were suffering (with low global demand for their products) as a result of an equally artificial high value of the US dollar that prevailed in the years before 1985.

[Some history: Between 1972 and 1981 the global price of oil increased nine-fold; fueling stagflation. In 1979 Paul Volker from the US Federal Reserve increased global interest rates in order to prop up a resultant ailing US dollar. That's also when the US-dominated World Bank moved to a commitment to global trade liberalization and abandoned its support for public enterprises.[3]

In summary, Bernanke's rationale for the strong US dollar from the years 1996 - 2000 doesn't appear to stand up to historical evidence. If the US benefited from such a profitable investment environment then why didn't that result in a boom in US manufacturing and a resolution of that nation's trade deficit in those years? The opposite, in fact, occurred.

The Global Saving Glut and the U.S. Current Account Deficithttp://www.federalreserve.gov/boarddocs/speeches/2005/200503102/

[2] STOCK MARKET KEYNESIANISM ….WHAT IS GOOD FOR GOLDMAN SACHS IS GOOD FOR AMERICA - THE ORIGINS OF THE CURRENT CRISIS. Robert Brenner, Center for Social Theory and Comparative History, UCLA 18 April 2009 This text appears as the Prologue to the Spanish translation of the author’s Economics of Global Turbulence (Verso, 2006) which was published by Akal in May 2009.

[3]'JECOR' was the name of a program instituted by the American power elite to recyle the petro-dollars from the Middle East after the enormous price hikes in this commodity. Petrodollars were used (amongst other things) to hire American firms to industrialise Saudi Arabia with the overall management and fiscal responsibility delegated to the US Department of Treasury. The commission so set up was “independent to the extreme”. Ultimately, it would spend billions of dollars over a period of more than twenty-five years, with virtually no congressional oversight. Because no US funding was involved, Congress had no authority in the matter, despite Treasury’s role. ”

Source: David Holden and Richard Johns, ‘The House of Saud: The Rise and Rule of the Most Powerful Dynasty in the Arab World (New York: Holt Rinehart and Winton, 1981), p359. As quoted in ‘Confessions of an Economic Hitman’ by John Perkins. Page 84. Published by Ebury Press Random House, 20 Vauxhall Bridge Road, London SWIV 2SA. 2005. ISBN 978091909109

Greg Mankiw thinks we should try a different kind of fiscal stimulus than the one passed earlier this year. Of course, the one passed earlier this year was a mix of spending increases and tax cuts (see for example Nate Silver). Some of us argued that including tax cuts lowered the bang for the buck from the stimulus package but Greg disagrees:

Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending.

Greg is citing evidence from periods when the interest rate was positive. Gauti Eggertsson asks What Fiscal Policy Is Effective at Zero Interest Rates? His abstract reads:

Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures. Another example is a cut in capital taxes. This tax cut deepens a recession because it encourages people to save instead of spend at a time when more spending is needed. Fiscal policies aimed directly at stimulating aggregate demand work better. These policies include 1) a temporary increase in government spending; and 2) tax cuts aimed directly at stimulating aggregate demand rather than aggregate supply, such as an investment tax credit or a cut in sales taxes. The results are specific to an environment in which the interest rate is close to zero, as observed in large parts of the world today.

This is immediately followed by table one showing a government spending multiplier equal to 2.27 whereas the labor tax multiplier is negative 0.81. Hat tip to Paul Krugman.

Monday, December 14, 2009

President Obama pressed Wall Street bankers at the White House on Monday, urging them to make more loans and modify mortgages to help taxpayers who propped their banks up with federal bailouts. "My main message in today's meeting was very simple: America's banks received extraordinary assistance from American taxpayers to rebuild their industry," Obama said. "Now that they're back on their feet, we expect an extraordinary commitment from them to help rebuild our economy." The president was expected to pressure the nation's top dozen bank chief executives to open up the lending spigots to help the economic recovery.

It is true that the Federal Reserve is doing all it can to increase bank loans and the money supply and the Federal government did institute that TARP “bailout” of our major banks. Yet, banks have chosen to let reserves skyrocket. Paul Krugman notes that the recently departed Paul Samuelson sort of predicted this back in 1948:

Today few economists regard Federal Reserve monetary policy as a panacea for controlling the business cycle. Purely monetary factors are considered to be as much symptoms as causes, albeit symptoms with aggravating effects that should not be completely neglected. By increasing the volume of their government securities and loans and by lowering Member Bank legal reserve requirements, the Reserve Banks can encourage an increase in the supply of money and bank deposits. They can encourage but, without taking drastic action, they cannot compel. For in the middle of a deep depression just when we want Reserve policy to be most effective, the Member Banks are likely to be timid about buying new investments or making loans. If the Reserve authorities buy government bonds in the open market and thereby swell bank reserves, the banks will not put these funds to work but will simply hold reserves.

Samuelson was arguing back then that we might need more vigorous fiscal stimulus in situations like the one we have today. I think our President understands this as well but then there certain members of Congress who do not.

On Friday, protesters destroyed property at the home of Robert J. Birgeneau, Chancellor of the University of California, Berkeley. This action violated the law. At the same time, the law condoned a far deeper destruction of education throughout the state. The governor and the legislature decimated public education, all the way from the primary schools to the state's university system.

For the most part, business applauded the state's stance. Why not? Education will have no choice but to turn to the private sector to run public schools or to take stakes in the universities, as BP has done with the University of California, Berkeley.Affluent taxpayers, who can afford private education, can rest easy, knowing that increase taxes are not on the horizon. Many ignorant people, whipped up by a false populism, also cheer on the shrinking of the state.

The loss of the Chancellor's planters and windows is regrettable, but they will be easily replaced. In contrast, the educational system may never recover.

The protesters did not constitute a threat. In fact, their actions may not even been productive.

Woody Guthrie once wrote: "Some will rob you with a six-gun, And some with a fountain pen.” Alas, we know who holds the fountain pens.

Sunday, December 13, 2009

The New York Times online obituary section has just posted the death of Paul A. Samuelson at his home in Belmont, MA at the age of 94. The first sentence of the obit labels him "the foremost academic economist of the twentieth century." Whether he was or not, the death of this recipient of the second Sveriges Riksbank Prize in Economic Science in Memory of Alfred Nobel back in 1970 is of one who was unquestionably an enormously influential, whose real influence has somewhat slipped into the background in recent years as attention to many others has surged forward. Often when he has been thought of or mentioned, it has been in criticism by many from many different sides, as he is seen as the father of the postward neoclassical synthesis, promulgated most influentially in his textbook, whose 19th edition (now done by Nordhaus) has just come out with many changes from what it used to be (many not for the better), although the deeper intellectual influence has been his Ph.D. thesis, published in 1947 as _The Foundations of Economic Analysis_, with his publishing career dating all the way back to 1937, on many topics. His influence is so great in so many areas that the key papers by him that lie behind the standard textbook accounts in many areas do not even bother to cite them.I have been critical of Samuelson myself, and gave him quite a hard time the first time I met him in person 38 years ago. However, starting with that encounter, I must confess that while he may be the ultimate origin of much that is misguided in deeply entrenched conventional economic thought, he himself was generally personally aware of the flaws and limits of many of his own ideas, even as near the end he insisted on reasserting some of them more strongly than ever. However, I would say that the greater sins have been by simplifying followers of his, the "sons of Samuelson," who have been more responsible for codifying and spreading and enforcing the more simplistic versions of what he posited. The man himself was more complicated and self-aware than many gave him credit for , and he is indeed the last of the giant economic thinkers whose professionally active roots go back clearly into the Great Depression.

Saturday, December 12, 2009

As one of the economists who signed in support of the UCS campaign for climate change legislation, I have to express my disappointment with your response to the Cantwell bill.

1. It is by far the best bill before Congress. It has two features that any serious environmentalist should enthusiastically support: no offsets and upstream (comprehensive) permitting. This is the right architecture. It is simply shocking to me that the bill would be criticized on exactly these grounds! You appear to endorse offsets as a means to secure an international agreement, as if this discredited approach were the only basis for moving forward globally. Clearly UCS is not paying attention to the current discussion around the validity of offsets.

2. You criticize the 2020 targets in Cantwell, but specific targets are meaningless. No matter what bill is passed, Congress will be revisiting these targets every year or two as new scientific evidence emerges and political winds shift (for better or worse). Any target announced today for more than a decade into the future is purely symbolic. What matters is getting the architecture right, so that, if there is political support for more stringent goals, they can be accomplished expediently.

3. Remarkably, UCS sees fit to attack the Cantwell bill on the other feature it gets right: it auctions all the permits and distributes most of the money back to households. Aside from the other justifications for this approach, it is now clear that this is the only way there can be enough political support for serious GHG mitigation. UCS' advocacy for spending carbon revenues on its own desired projects is politically naive. (a) UCS and its environmental allies will not control the allocation process. If Congress gets to parcel out these funds, you can be sure that most will go into "clean coal", biofuels, etc. (b) Carbon revenues are available to be allocated only if Congress passes a bill with a reasonably tight cap, provisions for auction, and few or no offsets. But this will be achieved only if the electorate is convinced it will not be at the expense of their household budgets. Only revenue recycling can accomplish this.

So why on earth has UCS adopted this position? Can it be because you have decided that Kerry et al. is the horse to ride, and that any other approach is a distraction? If so, you should say this and not trot out implausible and disingenuous arguments.

Again: I am really disappointed in UCS. I can't see myself signing any more of your petitions in the future, and in saying this I know I speak for many other environmentally-aware economists.

Friday, December 11, 2009

A world full of distressed corporate sellers is utopia for the huge global private equity companies. In the dying days of the unpopular Howard government the tax rules were changed. Foreigners no longer have to pay capital gains tax in Australia unless the bulk of their dealing is in property.

"At the time, the rationale for the change was that most of our major trading partners have the same rule in place. It was generally agreed by all international parties that it would be best if corporations and individuals paid tax in their home countries rather than in the country where the profits were made." [1]

But the huge profits made by the Texas Pacific Group didn't go back to the US.

"The cash went to a tax haven in the Cayman Islands and then on to a tax-effective structure in Luxembourg via the use of a Dutch company to take advantage of a tax treaty with the Netherlands."

TPG stands out as one of a small group of winners from the global financial crisis. They're hunting the world for as many assets (public utlitilies (water, forests, electricity, finance etc) to grab up at bargain-basement prices as quickly as they possibly can.

SOME RECENT HISTORY:2009 – December 7th. Former Tasmanian Premier, Robin Gray, has a son who is head of the huge global private equity company TPG. TPG is involved in the creation of shell companies using offshore tax havens. This strategy has allowed TPG to avoid paying hundreds of millions of dollars in tax on just one transaction.

2009 – December 4th. TPG and American Airlines to invest $1.1bn in Japan Airlines. “Debt-laden JAL faces bankruptcy unless it undergoes a major restructuring to cut costs and is seeking a government bail-out as well as any capital from American Airlines or Delta (and other SkyTeam members). Japan Airlines is no stranger to hard times having been bailed out by the Japanese government three times since 2001, and currently seeking more state support. The company is struggling with a $15bn debt load and a pension deficit.”

2009 – January 16th. Carlyle, TPG, KKR are bidding for AIG’s Aircraft-Leasing Unit and also Los Angeles-based International Lease Finance. (A shortage of buyers for a broad range of corporate debt has crippled the leasing companies’ ability to buy planes, leading to an “incipient crisis in the large civil aircraft market”). The world’s buyout firms are looking for ways to put their estimated $400 billion of committed capital to work after the global credit crisis restricted leveraged lending and reduced LBOs by about 70 percent last year. Forced sales by financial companies may provide some of the best opportunities. “You have a situation where there’s a distressed seller and these are the times when private-equity funds get their best returns.”

It was reported that such a debt-financed takeover binge came to a halt with the eruption of the sub-prime securitisation crisis in September 2007. In March 2008 Carlyle Group was, for instance, was reported to have failed to meet margin calls with four banks. What has changed the fortunes of these takeover merchants since that time?

[1] Day of the locusts as private equity rms bend the rulesNovember 21, 2009. Ian Verrenderhttp://www.smh.com.au/business/day-of-the-locusts-as-private-equity-rms-bend-the-rules-20091120-iqtg.html

The Washington Post asks - How much bang would he get for the borrowed bucks? – in reference to the President’s latest stimulus proposals. This is an odd place to suggest that freer trade with Colombia and South Korea could represent “truly fresh thinking about job creation”. As Paul Krugman notes:

if you liberalize trade countries will export more. But they will also import more. If you’re worried about C+I+G+X-M, it’s a wash, because X and M rise equally … Even if the proposed trade deals with Korea and Colombia were remotely big enough to bear mentioning in the context of the crisis — which they aren’t — they wouldn’t be job creation measures.

Using this source, one can see that our exports to these two nations during 2008 were only $46 billion, while our imports from these two nations were $61 billion. Let’s say the “equally” part of what Krugman wrote isn’t quite right and that free trade increases our exports by 20 percent (some $9 billion) while imports rise by only $10 billion (some $6 billion). With GDP in excess of $14 trillion, even our generous estimate of this WaPo policy proposal has it adding a mere 0.02 percent to aggregate demand. Not exactly a big bang! Do the folks at the Washington Post know how to look up trade information?

The elites who matter in the formation of economic policy have long favored a national value-added tax (sort of like a sales tax), and from time to time we see puff pieces like this one in today’s the New York Times. The story is always the same: we (the masses) need to consume less and save more, so that the economy can be fertilized with more investment and grow faster over the long run. The urgency of this message is amplified by two more current concerns: changing America’s consumption behavior is seen as key to bringing down the current account deficit, and the mushrooming fiscal deficit requires fresh thinking on the tax front.

It’s all rejectable.1. The decision to save does not prompt a decision to invest. It might lower interest rates, but interest rates are only weakly related to business investment (unlike investment in housing which does not stoke productivity), and in any case interest rates will be low in the US for years to come. (Yield curves tell us this.) The only circumstance under which savings are a bottleneck for investment arises in an economy that is generating high levels of investment for other reasons. European countries that use a VAT, for instance, typically have industrial policies, whether they admit it or not, which keep investment bubbling. In the US, less consumer spending means depressed employment and output. This is in our probable future no matter what, but why exacerbate it?

2. We are back to the tail and the dog, the horse and the cart, or whatever metaphor strikes your fancy: is the yawning US trade deficit (down but not sustainably in the latest monthly release) the result of spending beyond our means, or have our means been downsized by decades of outsourcing and reliance on imports? Those who have followed this blog know that I think the weight of logic and evidence comes down mainly on the side of explanation #2. Thumbnail version: the first story depends on confusing identity with behavioral relations—to be a net importer is to identically be a net dissaver—and the evidence on potential transmission mechanisms clearly points to the primacy of trade competitiveness, or lack thereof, in recent US history. (There will be a new paper on this topic for the Atlanta meetings.)

3. Big fiscal deficits at a time of deep recession are the medicine, not the disease. If the US economy remains this depressed for years into the future then, yes, the deficits are dangerous—but the cause is the economy, not the fiscal policies taken to stanch the bleeding.

But there is a bigger story here. During the decades in which the Washington Consensus was gospel, we were told that, because markets could do no wrong, the private sector should be free to accumulate as much debt, and in whatever form, as it chose, whereas governments, being irredeemably corrupt and incompetent, must be held to the highest standards of fiscal prudence. Then the roof caved in, and now the private debt has been nationalized. Today we look to the sovereign advantages of government as debtor of last resort to hold off the threat of private insolvency and credit gridlock. Indeed, from a purely arithmetic standpoint, if households and businesses in the US commit to deleveraging, the US external deficit can only be sustained by fiscal deficits of a similar magnitude.

In the opening paragraph it is written that the unexpected rise in 'factor output' signals "a strengthening recovery in the world’s third-biggest economy." However there are some rather odd assertions throughout the rest of this article.China is experiencing deflation. "Producer prices fell 2.1 percent last month from a year earlier, after dropping 5.8 percent in October." Not to worry, the problem of deflation has been solved by higher food and energy prices: "Food and energy price increases helped to bring deflation to an end, said Sun Mingchun, chief China economist at Nomura Holdings Inc. in Hong Kong."

China suffers from inflation. "Consumer prices rose 0.6 percent." AND "Property prices in 70 cities rose at the fastest pace in 16 months in November and the benchmark Shanghai Composite Index has jumped almost 80 percent this year." AND "The government last month approved increases of as much as 8 percent to gasoline, diesel and jet fuel prices and raised retail power charges for the first time in 16 months."

There is economic growth but it has come from the Chinese Government printing money and from a general increase in debt. "A $586 billion stimulus package, record bank lending and incentives for purchases of cars and home appliances are supporting industrial output.."

There is a global climate change catastrophe playing out in the context of an equally alarming world shortage of energy. However, "Bayerische Motoren Werke AG, the world’s largest maker of luxury cars, said last month that it will build a new factory worth 5 billion yuan to tap an auto market set to overtake the U.S. as the world’s largest this year."

Is there a creeping realisation that governments haven't fixed the problems arising from the global financial crisis? Governments have just increased the level of debt on top of the existing unsustainable levels. Finance is being directed into the production of more unsustainable oil guzzlers. Inflation + deflation equals 'stagflation'.

Whew! Global limits to growth can't be wished away by printing money and churning out more cars. Mass production, on the other hand, can't survive without large quantities of goods being produced to provide for the certain and regular demand that is essential to capitalism.

Thursday, December 10, 2009

"Submit a question" says the button at the bottom of the page on the "AFL-CIO Open for Questions with President Richard Trumka" gimmick. Nothing happens. There is no hyper-link associated with the submit-a-question doohickey. If the AFL-CIO job plan is as ineffectual as their web programming... well, we already know the answer to that question.

I have spent the last two weeks shackled to my computer, sifting through five-point, nine-point and utterly pointless "jobs plans" offered by the White House, the AFL-CIO, Change-to-Win, the Center for Full Employment and Price Stability and the Chicago School of Economics. I have digested -- or rather swallowed -- all the lucubrations of the purveyors of job creation policy: those who advise even more deficit spending on infrastructure, aid to states and cities and extended unemployment benefits; those who call for WPA-style direct employment by the government and, of course, those who call for a lower minimum wage and a balanced budget to starve the unemployment out of the system. All these proposals leave me in a dazed state of mind bordering on idiocy.

Nevertheless I began to become dimly aware of an obscure germ of an idea buried deep in my mind, far superior to the whole catalogue of old wives' remedies I had so recently browsed. But it was only the idea of an idea, something infinitely vague. I left my room with a terrible thirst. The passion for bad boilerplate engenders a proportionate need for fresh air and distilled beverages.

As I was about to enter a bar, an unemployed recent university graduate approached me with a resume and looked at me with one of those unforgettable expressions which, if spirit moved matter, would overturn thrones.

At the same time I heard a voice whispering in my ear, a voice I recognized perfectly; it was the voice of my good Angel, or good Demon, who accompanies me everywhere. This is what the voice whispered to me: "A person is the equal of another only if he or she can prove it, and to be worthy of liberty, a person must fight for it."

Immediately, I leaped upon the job-seeker. With a blow of my fist I closed one of his eyes which in an instant grew as big as an orange. I broke one of my fingernails breaking two of his teeth and since, having been born delicate and never having learned how to box, I knew I could not knock out the young fellow quickly, I seized him by the throat and began pounding his head against the wall. I must admit that I had first taken the precaution of looking around me in this deserted suburb and I felt certain that no policeman would disturb me for some time.

Then, having by a vigorous kick in the back, strong enough to break his shoulder blades, felled the youth, I picked up a large branch that happened to be lying on the ground, and beat him with the obstinate energy of a cook tenderizing a beefsteak.

Suddenly -- O miracle! O bliss of the philosoper when he sees the truth of his theory verified! -- I saw that underfed carcass turn over, jump up with a force I should never have expected in a machine so singularly out of order; and with a look of hatred that seemed to me a very good omen, the decrepit vagabond hurled himself at me and proceeded to give me two black eyes, to knock out four of my teeth and, with the same branch I had used, to beat me to a pulp. Thus it was that my energetic treatment had restored his pride and given him new life.

I then, by various signs, finally made him understand that I considered the argument settled, and getting up I said to him with all the satisfaction of a cable TV network pundit, "Sir, you are my equal! I beg you to do me the honor of sharing my purse. And remember, if you are really philanthropic, when any of your colleagues asks you for aid, you must apply the theory which I have just had the painful experience of trying out on you."

He swore that he understood my theory and that he would follow my advice.

The Washington Post let Sarah Palin have some of its oped space to once again make a fool out of herself – this time on the subject of global warming. Interestingly, she simultaneously claims global warming does not exist AND that it does exist but is not caused by human factors. But Ravi Somaiya has already done a fine job of debunking most of this oped so let me focus on this line:

Meeting such targets would require Congress to pass its cap-and-tax plans, which will result in job losses and higher energy costs

Whether we decide to pass a Pigovian tax, which would be the preference of Greg Mankiw, or we go with cap-and-trade, the change in the relative price of energy would not lead to the kind of massive job losses that the rightwing liars such as Sarah Palin are asserting. But could someone kindly explain to Ms. Palin that there is no cap-and-tax proposal? We are talking about choosing between a tax plan versus a cap-and-trade plan.

I stay away from debating whether regulation or taxes beat cap and trade on limiting CO2 emissions, because I don't think it is something to be settled theoretically. Or -- worse -- speculatively, say, on the grounds that we distrust markets more than we distrust the state. Or vice versa. As far as I'm concerned, both markets and the state are undesirable, because we collectively can't control them effectively. So, we need to disolve them, which can only result from a long series of revolutions. So, for the time being, the issue ultimately boils down to empirical measure and -- on the practical side -- a lot of trial and error.

The general theory appears straightforward to me. Well, kind of. Paul Krugman recently wrote in his blog that cap and trade and Pigouvian taxes (or subsidies for that matter) are essentially equivalent. I think he meant it in the following sense:

If you know the supply (or marginal cost) and demand (or marginal benefit) functions, private and social (i.e. without and with the external effects), then you can always determine the socially optimal level of CO2 emissions, level that you can then split into shares and allocate them to people, who can then trade them in a market. If people follow the script of their market functions (i.e. if the assumptions that underpin market functions hold), then the amount of emissions would be capped at the socially optimal level.

Similarly, if you know the supply and demand functions, you can always determine a Pigouvian tax (or subsidy) to induce producers to reduce emissions from the privately optimal level to the socially optimal one. All is required is setting the tax (or subsidy) at an amount equivalent to the size of the net external cost at the privately optimal (but socially inefficient) level of emissions. That forces emitters to internalize the net external cost, who then willingly limit their production to the socially optimal level.

Quick and dirty actions to solve practical problems beat no action at all in the hope that a perfect solution will fall from the sky. The practical experiences of taxation and cap and trade need to be studied very carefully -- something I've not done. But from afar I can see a few thorny practical issues, even if measuring the level of emissions were simple:

How on earth do you determine the private and social supply and demand functions? For example, the location and shape of estimated supply and demand functions is highly sensitive to the period of time considered. Basically, choose a sufficiently long period of time, and you can always make the elasticities arbitrarily large. With arbitrarily large elasticities, very tiny taxes (or subsidies) would -- in theory -- do the job. So, what is the relevant period of time? This wrecks all approaches, including plain regulation (i.e. telling emitters how much CO2 to emit, period). And this is separate from the technical, empirical issues of estimating market functions (well, their elasticities, from which you can integrate costs and benefits).

Another issue I find daunting is that supply and demand, private and social, are continuously shifted by a bunch of factors without prior notice: technology, consumption patterns, prices of virtually everything else. Basically, a perfect regulator would have to re-calibrate dynamically, continuously (or at least with such frequency that the benefits of recalibration are not offset by the associated transaction costs), the socially and privately optimal levels. Otherwise, there'd be garbage-in garbage-out with any of the approaches.

Then the practical issues of administering the approach, in the face of the profit motive, the incentives of public servants, the motivations of the public, etc.

By the way, I haven't seen anybody challenging what I believe is a fundamental presumption under cap and trade as is, namely that the national shares of allowed CO2 emissions are to be allocated to the emitters only. (Am I right that this is the presumption?) I'd expect to hear left-wing economists denouncing this as sheer theft. The rights of ownership over the atmosphere are assumed to belong exclusively to the main CO2 emitters? How about the rest of us? To start with, I would expect cap and trade allocating permits to everybody following a simple egalitarian rule: one (equal) share per person. We can then decide whether to trade it in the market or make origami figures with them.

I'm sure that something like this would be easier to implement than land reform in Mexico. If it worked, we could then confidently extend the practice to the myriad of other net externalities resulting from capitalism -- environmental and social. For example, if manufacturers produce gadgets along with garbage and sick workers; if TV, Frito Lay, and Pepsi produce pleasure along with stupidity, obesity, and consumerism; if banks produce whatever they produce along with crashes that ruin our lives; etc., then as rank-and-file users of the natural and social environment, we are entitled to the same allowance of permits to destroy nature and society as everybody else.

It would not be the end of markets and the state, but at least we'd be talking!

Tuesday, December 8, 2009

The lump of labor charge has a long and complicated history, surviving several explanatory twists and turns and passing effortlessly from the propaganda mills of employer associations, to newspaper columns to introductory economics textbooks. If, on the one hand, claimants were remiss in providing textual evidence to support their claims of fallacy, their insistence that shorter work time advocates invariably committed the fallacy creates a double bind for the concept of economic man.

If workers are notoriously irrational about the question of selling their labor, how can they be generally assumed to be rational economic actors? One possible answer would be to say that it would be rational for workers individually or in small units to act as though there is a lump of labor even though in the aggregate, it does no good. That argument would resemble the paradox of thrift, with the difference that economists down through the ages have not devoted so much energy chastising and ridiculing savers. Less charitably, it would appear that the economists' perennial attachment to the fallacy claim discloses a profound and hypocritical ambivalence – that is to say, a lack of rigorous commitment – toward their supposedly rational economic actor. They don't really mean it. Rational economic man is only rational when it suits the economists' argument.Leaving aside the ridiculous notion of a lump of labor of fixed quantity, viewing the labor supply as a collective or common pool resource may not be all that far-fetched. In "Foundations for Environmental Political Economy," John Dryzek explored the prospects of an alternative to economic man -- a Homo ecologicus. Dryzek dismissed previous efforts at posing an ethical, environmentalist economic subject as flawed by wishful thinking and reductionism. "The ecophilosophical house is an attractive dwelling but nobody has any idea how to build it." On the contrary, "we know how to build the microeconomic house, but it is an ugly and incommodious dwelling?"

The alternative Dryzek proposed was based on his interpretation (or over-interpretation, as Dryzek confesses) of Nobel laureate Elinor Ostrom's work on Common Pool Resources. That new political economy would be one that can account for instrumental rationality – and even deploy it in its proper place – but that also can point to alternatives grounded in something firmer than wishful thinking. Those alternatives can't be entirely specified in advance because they evolve over time in response to changed circumstances. However, their general characteristics can be deduced from past experience.

Those alternatives rely not only on subjectivity but also on inter-subjectivity; that is, on communicative rationality. What distinguishes the successful case studies Ostrom documented is that "individuals repeatedly communicate and interact with one another… they can learn whom to trust, what effects their actions will have on each other and on the common pool resource, and how to organize themselves to gain benefit and avoid harm. These practices and learning constitute a kind of social capital upon which they can build institutional arrangements for resolving difficulties." People learn to act differently. They begin to behave more "straightforwardly" toward each other and less strategically.

Successful institutions of this sort rarely come into being through explicit contracts. More often they evolve through long periods of informal, collective learning about what works and what doesn't. Another approach to these institutions would involve more deliberate experimentation with institutional innovations. For such institutional reconstruction to take place, however, it is essential that participation "move beyond the narrow community of political economists and political theorists and into society at large."

One such deliberate experiment would be to retrieve a lump of labor counter-narrative, modifying the conventional myth "just a bit" – but in a way that makes "all the difference in the world." Instead of a fallacious assumption, this re-functioned lump could stand for an ethic of collective and cooperative working behavior. In this ethic, people "hold up their own end," but they also do not run out too far ahead of everybody else. They "share and share alike" the burdens, the rewards, the pain and the joy of work.

The traditional craft workers' ethic involved treating employment as something very similar to a common resource. That is to say, it included the proposition of a "lump of labor" to be divided up between the available hands. That is, not an abstractly 'fixed' amount of work, but a concretely given quantity. It follows from such an ethic that if there aren't jobs enough to go around, those who have one should share by giving up some of their hours. Whether or not that idea makes sense in terms of industrial efficiency, as an ethical proposition it is no more or less fallacious than the golden rule or the Ten Commandments. It is simply the inevitable reciprocal movement to co-operation.

Although economists have traditionally insisted that the lump-of-labour idea is a fallacy, one economist, Sir Sydney Chapman, suggested that even if it was a fallacy, it might have prevented workers from competing ruthlessly for jobs and thus undermining their standard of living. If so, it led them to do the right thing even if it was for the wrong reason. Chapman may have almost hit upon something rather profound. What if we view the so-called lump-of-labor as an ethical proposition rather than as an economic assumption – fallacious or otherwise? Collectively, working people would be better off if they joined in refusing to compete in a race to the bottom. Of course some individuals might have to forgo receiving more than their share of the "economic progress" that would result from competition between workers and the resulting low wages. But where does it say that it is ethical for a few people to benefit at the expense of the many? Furthermore, by collectively conserving work effort, the workers acting co-operatively could achieve higher levels of productivity than otherwise as well as build greater social solidarity and security.

What I'm getting at here is not only that labor can be regarded as another common pool resource among many but that it is the common pool resource par excellance – a case that can provide the most far-reaching and democratically vital instance of a CPR. Donald Stabile alluded to something similar when he noted, in "Accountants and the Price System: The Problem of Social Costs," that "Human labor is also the primary constituent of the society whose values must be part of any criterion of social evaluation. The appropriate starting point in any policy directed at social costs is with those imposed on labor."

In his article, Stabile focused on the perspectives introduced by John Maurice Clark in his Studies in the Economics of Overhead Costs. Clark argued that labor should be treated, socially, as an overhead cost of doing business rather than as a variable cost of the employing firm because the cost of maintaining the worker and his or her family "in good stead" has to be borne by someone whether or not that worker is employed. "If all industry were integrated and owned by workers, what would be the relation of constant to variable expense? ...it would be clear to worker-owners that the real cost of labor could not be materially reduced by unemployment."

Commenting on the movement of accountants during the 1970s that sought changes in the way social costs were accounted for on the corporate account books, Stabile concluded that the movement had not developed useful concepts for examining social costs. To explain why it had failed, Stabile placed the ideas of social cost accounting in an institutionalist context, using the perspective on social costs set forth by Clark and by K. William Kapp. In their work, Clark and Kapp introduced a framework that included a process of social evaluation, a process in which analysis of the social costs of labor is central. Such an outlook is missing from the works of social cost accountants, "Market values are a weak thread from which to hang a whole system of value," Stabile argued, "but accountants cling to it doggedly. Without an alteration of this basic tenet of accounting, social cost accounting cannot develop into a criterion of social value."

Returning once again to the thought experiment of the hypothetical state where all industry is integrated and owned by workers, here is an instance of a non-market process of social evaluation whose results can readily be readily be worked out with little hesitation, unemployment would be regard as waste rather than as a regrettable but necessary measure for containing the cost of labor. This is another way of saying that a social accounting for unemployment would come to a very different assessment of economic "efficiency" than would a narrowly financial one. The "fallacy" of the lump of labor thus results from the refusal of workers to arbitrarily limit their perspective to the narrow, self-interested terms favored by business propagandists and economists. "In any highly developed discipline," wrote Eugene McCarthy and William McGaughey, in Nonfinancial Economics: The Case for Shorter Hours of Work:

…there is a tendency for thought processes to become so specialized and refined that its respected practitioners appear to lose common sense. If medieval philosophers counted the number of angels that could dance on the head of a pin, some contemporary economists deal in equally strange and fictitious concepts. To many of them, it would seem, money is reality, while leisure is an empty spot in time devoid of wealth-producing activities.